100% Financing Home Loans and Low Down Alternatives

The phrase 100% financing home loans echoes wildly from our recent financial past. Zero down mortgage programs tend to come into favor in hot markets and wane in more risk-averse times. And occasional market corrections tend to really reign in aggressive lending.

In fact, lenders tapped the brakes (quite hard I might add) on 100% financing home loans after the mortgage meltdown in 2008. When the party ended, lenders shifted some risk back to borrowers. Here’s what shifting risk to borrowers means in plain English: borrowers now need to come to the table with a reasonable amount of down payment cash. You know, a little more skin in the game.

Even with the ups and downs of market cycles, VA and USDA loans have maintained their steady status as widely-available zero down mortgage options. What’s more, now that time has healed all wounds from past market excesses, there are even many very-low-down-payment options. We’ll take a look at all of them.

100% Financing Home Loans

VA Loans / 100% Financing

An estimated 7.3 percent of all living Americans have served at some point in their lives. If you’ve served in the United States military, VA loans are some of the best mortgage deals going for which you may qualify.

VA loans are zero down mortgages. To be eligible, the borrower’s military status may be:

Veterans honorably discharged

Active service members

Eligible veteran spouses

Currently on active duty

Here’s how zero down VA loans work. The VA guarantees (insures) loans that are made by private lenders (banks, mortgage companies, etc.) Private lenders follow VA requirements and guidelines in order for their loans to receive the VA’s backing (a form of insurance also known as the VA Guarantee). This risk-sharing arrangement helps lenders relax their underwriting rules and make more loans. The end result is that VA loans can be made to veterans with no down payment.

You don’t need to have perfect credit. The minimum FICO score is generally in the 620 to 640 range. It will vary just a little bit from lender to lender.

The VA guarantees zero down loans up to $417,000 in most areas of the U.S. and up to $625,000 high-cost counties (i.e. big metro areas). Property eligibility includes:

Incredibly, 100% financed VA loans do not require borrowers to carry mortgage insurance. However, there is an upfront VA funding fee, usually around 2% of the loan amount. (Slight fee variances exist depending upon a few key VA guidelines). This fee is what sets up the VA Guarantee; money goes into an insurance pool to protect lenders if borrowers can’t repay their loan. Another incredible aspect of VA loans is that there’s no ongoing monthly mortgage insurance premium.

To get started, veterans need to grab a copy for their Certificate of Eligibility (COE) from the VA e-benefits portal or have your loan officer pull it on your behalf.

USDA Loans / 100% Financing

USDA loans are another 100 percent financing option. Of course, everything that’s really good in life tends to have a catch. VA loans require military service to qualify and USDA loans have couple or their own caveats. Darn it. They are:

The borrower(s) household income must not exceed limits set by the USDA

The property must be located in USDA-eligible areas

Household income limits set by the USDA according to conditions like the area median income, number of household dependents, etc. You can walk through the income eligibility wizard on USDA’s site. The calculator asks for certain information and depending upon what you enter, it will kick out an adjusted gross income and let you know if you’ve qualified.

The property financed with a zero down USDA loan must also be within certain geographic areas, mostly rural. While you can rest assured you won’t find an eligible property in a major U.S. city, some surprising pockets exist. It’s not uncommon to find a USDA-eligible property in bedroom communities adjacent to big cities. Then again, who cares? Maybe you love living in the country!

Properties must meet the following characteristics to be USDA-eligible:

Owner occupied – you must live in it

Primary residence – you can’t finance an investment property or second home

Condos are eligible if they are part of a HUD-approved project

Manufactured homes are okay

In nearly every case, with the exception of VA loans, mortgages must be insured if the loan- to-value (LTV) is less than 80%. Another way to say it: when down payments are less than 20%, mortgage insurance is required.

Just like VA loans, USDA loans also have an upfront funding fee. Upfront fees are always part of the loan closing, regardless of LTV; they are a fixture of these two 100% financing home loan programs. Here’s the summary of USDA fees:

2.0% upfront funding fee

0.50% annual mortgage insurance (MI), spread out and paid monthly

Down payment gift money is allowed, but just like VA loans, they are pretty uncommon since USDA loans are zero down.

Low Down Payment Mortgages

FHA Loans / Low Down Payment

About 1 in 9 mortgages in the United States are FHA loans (over 40 million have been made since 1934)! One reason for their popularity is that they only require a low 3.5% down payment.

FHA allows loans up to $417,000 in most areas of the United States and up to $625,000 in high-cost areas, mostly in major urban centers. The relatively modest 3.5% FHA down payment is a great deal by any standard. As you might expect, a low down payments will kick in the mortgage insurance requirement. Specifically, when down payments are less than 20%, two kinds of mortgage insurance are put in play. They are:

1.75% Upfront mortgage insurance premium (UFMIP)

0.85% Monthly mortgage insurance premium (MIP)

The UFMIP is a cousin of the VA Funding Fee; it is a one-time fee paid at closing. FHA loans also require MIP, which is a smaller, ongoing monthly insurance premium paid by the borrower. Both the UFMIP and MIP contribute to the broader FHA risk pool. This is what enables the FHA to insure so many loans made by private lenders. It’s the government insurance that provides the backstop for more relaxed underwriting standards. Thus, the atmosphere exists for very low down payments and great interest rates.

Source of down payment funds

If you’re lucky enough to have someone in your life willing to contribute to the down payment, you can get a loan with no money out of (your) pocket. That’s because FHA guidelines allow gift funds which can cover the entire down payment and certain borrower closing costs.

Donors may include family members, employers, charitable organizations, churches or state-run down payment assistance programs.

However, some potential donors are not allowed. Specifically, no one can bestow a down payment gift if they have an interest in the transaction. This includes parties like real estate agents, builders or the seller. In other words, if someone stands to gain from the sale, they are excluded.

HomeReady / Low Down Payment

Fannie Mae’s HomeReady program only requires a 3% down payment (said another way, loans may be made at 97% loan-to-value). This program is geared toward low to moderate-income homebuyers. There are no income limits in low-income areas and some income limits in other census tracts. In other words, income limits vary depending upon the property location.

Another thing that’s different about this very-low-down payment mortgage program is the pre-purchase education requirement. Prospective borrowers must first take an online home ownership course to be eligible for HomeReady. Fannie Mae’s partner, Framework, is the course provider. There is a small fee to take the course.

HomeReady property requirements

Single family residence (1 unit only)

Condos

Co-ops

Planned Unit Developments (PUDs)

No manufactured housing

Other unique program characteristics:

Borrower(s) not required to be a first time home buyer

Fixed rate loan only, up to 30 years

Mortgage Insurance

Fannie Mae mortgage products (and Freddie Mac’s below) fall into the “Conventional” class of loans. Conventional mortgages are not backed by government agencies like VA or FHA. Instead, private mortgage insurance (PMI) is used to protect the lenders against losses.

No upfront mortgage insurance premium like FHA/VA loans

But has ongoing monthly private mortgage insurance (PMI) which varies depending upon the loan-to-value

Source of down payment funds

Gifts are allowed if donors are relatives (blood or by-marriage)

Grants are allowed

Gifts may cover closing costs

Reserves may also be gifted

“Reserves” refers to the money in your bank account that will be ‘in reserve’ after the loan is funded.

Interesting Fact: Fannie Mae is a government sponsored entity (GSE). While the word “government” is right in the company classification, it’s actually a private company. It just happens to have historical roots as a government agency. But it’s heavily regulated by the government because of how important a role it plays in the financial health of the United States. It’s like the post office. Sort of…

Conventional 97 / Low Down Payment

The Conventional 97 mortgage program (also known as Fannie Mae Standard) is another low down payment loan. In fact, the LTV only needs to be 97%, which as you might already know, another way of saying it only requires 3% down.

Here’s what makes the Conventional 97 program different from HomeReady:

No income limit

No pre-purchase home ownership education requirement

Must be a first-time home buyer

Conventional 97 Property Requirements

Single family residence (1 unit only)

Condos

Co-ops

Planned Unit Developments (PUDs)

No manufactured housing

Loan Limits

Conventional 97 mortgages are capped at $417,000. There are no exceptions, even in high-cost areas such as major U.S. cities.

Mortgage Insurance

No upfront mortgage insurance premium

Monthly private mortgage insurance (PMI)

Source of down payment funds

Gifts and grants may be used for the down payment and closing costs

Reserves may be gifted

Sellers may contribute to closing costs and pre-paid items

Home Possible Advantage / Low Down Payment

Home Possible Advantage is a Freddie Mac mortgage program. It’s a conventional mortgage with a low down payment requirement of 3%. It’s designed for low and moderate-income borrowers.

First-time borrowers must take a homeowner education course such as Freddie Mac’s CreditSmart

Borrowers don’t have to be first time home buyers

Borrower’s annual income must be equal to or less than the area median income

Property Requirements

Owner occupied, primary residence

Single family residence (1 unit only)

Condos

Planned Unit Developments (PUDs)

No manufactured homes

Loan Limits

The Home Possible Advantage program is capped at $417,000. There are no exceptions, even in high-cost areas such as major U.S. cities.

Mortgage Insurance

No upfront mortgage insurance premium

Monthly private mortgage insurance (PMI)

Source of down payment funds

Up to 3% of the down payment may come from mortgage gift funds

Grants are also allowed

State and Local Government Programs

Many states have their own loan programs, down payment assistance programs and grants. Even some cities have home affordability programs.

For example, California has several first time buyer programs and programs that provide down payment assistance (DPA). What’s really cool is that it’s possible to combine DPAs with one of the low interest rate loans. By combining an eligible loan with an eligible assistance program, the end result can produce a zero down, 100% financing home loan.

Washington has several mortgage programs and DPAs. Oregon only has 2 loan options and a few scattered DPA programs handled by small local agencies. And that’s too bad since Portland housing prices are among the least affordable on the West Coast. Within states, some cities and regional programs help moderate and low-income borrowers through assistance programs and grants. These programs are typically only available within low income census tracts and underserved communities.